Same Income Can’t Be Taxed Twice: Court Nixes Double Tax on Undisclosed Swiss Account

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Case Name

Principal Commissioner of Income Tax & Ors. vs. Krishan Kumar Modi & Ors. (High Court of Delhi)

ITA 48/2021 & CM APPL. 6877/2021

Date: 22nd February 2021

Key Takeaways

• No Double Taxation: The court reaffirmed the legal principle that the same income cannot be taxed in two different assessment years.
• Burden of Proof: The tax department must provide clear evidence if it wants to tax undisclosed income or interest.
• Protective vs. Substantive Assessment: If income is offered for tax in one year, it cannot be taxed again in earlier years on a “protective” basis.
• Interest Income Needs Proof: Without evidence of actual interest earned, notional interest cannot be added to taxable income.
• Legal Precedent: The decision strengthens taxpayer protections against arbitrary or repetitive tax assessments.

Issue

Can the same undisclosed amount in a foreign bank account be taxed in more than one assessment year under the Income Tax Act, 1961?

Facts

• Search and Seizure: In November 2011, tax authorities searched the premises of Krishan Kumar Modi based on information from a Double Taxation Avoidance Agreement, revealing an undisclosed Swiss bank account.
• Taxpayer’s Response: Modi denied owning the account but, to avoid litigation, agreed to offer the equivalent of US $1,146,368 as income in his 2012-13 tax return.
• Tax Department’s Action: Despite this, the Assessing Officer (AO) also taxed similar amounts in earlier years (2006-07 and 2007-08), converting the dollar amounts to rupees at the relevant rates.
• Appeals: Modi challenged these additions. The Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) both ruled in his favor, stating the same income cannot be taxed twice.
• Further Appeal: The tax department appealed to the High Court, arguing for the right to tax the amounts in multiple years.

Arguments

Tax Department (Appellant-Revenue)

• Section 69 of the Income Tax Act, 1961: Claimed the foreign bank deposits were undisclosed investments and should be taxed as income in the years the deposits were made.
• Interest Income: Argued that interest should be presumed to have been earned on the foreign account and taxed accordingly.
• Burden on Taxpayer: Pointed out that Modi did not sign a consent waiver to allow the government to get more information from the Swiss bank.

Taxpayer (Respondent-Assessee)

• No Double Taxation: Asserted that the same amount cannot be taxed in more than one assessment year.
• No Evidence of Interest: Argued there was no proof that interest was actually earned on the foreign account.
• Offered Income for Tax: Highlighted that the full amount was already offered for tax in the 2012-13 assessment year.

Key Legal Precedents & Sections

• Section 69 and Section 69A of the Income Tax Act, 1961: Relate to unexplained investments and money, respectively.
• Section 132(4): Statement recorded during search proceedings.
• Section 153A and Section 143(3): Procedures for assessment after a search.
• Section 260A: Appeals to the High Court.
• CBDT Instruction dated 11-5-1994: On treatment of seized jewellery (relevant for a related issue in the case).
• Case Law Cited: CIT v. Kailash Chand Sharma 147 Taxman 376 (regarding treatment of jewellery as explained or unexplained).

Judgement

• Court’s Decision: The High Court agreed with the ITAT and CIT(A) that the same income cannot be taxed twice in different assessment years. The additions made by the AO for the years 2006-07 and 2007-08 were deleted.
• Interest Income: Since there was no evidence of actual interest earned, the addition of notional interest was also deleted.
• Outcome: The taxpayer’s offer to tax the full amount in 2012-13 was accepted as final. The tax department’s appeals were dismissed, and no substantial question of law was found to arise.
• Jewellery Issue: The court also addressed a related issue about unexplained jewellery, holding that the amount found was less than what was declared in wealth tax returns, so no addition was warranted.

FAQs

Q1: Can the same income be taxed in more than one assessment year?

A: No, the court confirmed that the same amount cannot be taxed twice in different assessment years.

Q2: What if the taxpayer already offered the income for tax in one year?

A: If the taxpayer has already offered the full amount for tax in one year, the tax department cannot tax it again in earlier years.

Q3: Can notional interest be taxed without proof?

A: No, the court held that without evidence of actual interest earned, notional interest cannot be added to taxable income.

Q4: What happens if the taxpayer doesn’t cooperate with the investigation?

A: While non-cooperation (like not signing a consent waiver) may raise suspicion, the burden is still on the tax department to provide evidence before making additions.

Q5: What about unexplained jewellery found during a search?

A: If the jewellery found is less than what’s declared in wealth tax returns, and within CBDT guidelines, it is treated as explained and not added as unexplained income.

1. The present appeals under Section 260A of the Income Tax Act, 1961

(hereafter “the Act”) arise out of the common order of the Income Tax

Appellate Tribunal (“ITAT”) dated 5th July, 2019 in ITA No.

3956/Del/2017, ITA No. 3955/Del/2017, ITA No. 3954/Del/2017, ITA No.

ITA No. 3953/Del/2017, ITA No. 3952/Del/2017, ITA No. 3951/Del/2017

and ITA No. 2892/Del/2017 for assessment years 2012-13, 2011-12,

2010-11, 2009-10, 2008-09, 2007-08, and 2006-07 respectively. Since all

the appeals raise identical questions of law, the same have been heard

together and are being disposed of by way of a common order.

2. Briefly stated, on 9th November, 2011, a search and seizure action

under Section 132 of the Act was carried out at the premises of the

Respondent-Assessee, on the basis of information and documents made

available to the Government of India under a Double Taxation Avoidance

Agreement, which revealed existence of an undisclosed Swiss bank account

maintained by the Respondent-Assessee. During search, the statement of the

Respondent-Assessee was recorded under Section 132(4), wherein the

Respondent-Assessee denied maintaining any such foreign bank account.

Nonetheless, the Respondent-Assessee agreed to offer to tax, income

equivalent to US $11,46,368 to buy peace and avoid litigation. On the basis

of the aforesaid statement, to cover the afore-noted amount of US$

11,46,358/-, the Respondent-Assessee offered to tax, in his return of income

filed on 28th July, 2012, under Section 139(1) of the Act an amount of Rs.

5,81,32,321/-, as income for AY 2012-13 under Section 69A of the Act. The

said amount was computed by applying the conversion rate of Rs. 50.71 per

dollar, as applicable in the relevant year 2012-13. Subsequently, pursuant to search under Section 132 of the Act, proceedings under Section 153A of the Act were initiated by the AO for AYs 2006-07 to 2011-12. In respect of AY 2012-13, the year of search, regular assessment was undertaken under

Section 143(3) of the Act. The AO vide assessment order passed under

Section 153A/143(3) for AY 2006-07 and AY 2007-2008, rejected

Respondent-Assessee's submission that he did not own any such foreign

bank account and added the undisclosed monies in Respondent-Assessee's

bank account under Section 69 of the Act. For the AYs 2007-08 to 2012-13,

AO also added interest income on the ground that the Respondent-Assessee

would have earned interest on the balance available in the foreign bank

account. In appeal, the CIT(A) held that deposits in the foreign bank account were rightly taxed by the AO under Section 69, however since no

corroborative evidence was adduced to establish that interest was actually

earned, the CIT(A) deleted the addition in that respect and the same was

upheld by the learned ITAT vide the impugned order. The learned ITAT

held that documents received by the Indian government are undated and

unsigned and do not contain reference to any bank. Since no evidence

emerged that the Respondent-Assessee had earned interest, the addition of

interest could not be sustained. For AYs 2006-07 and 2007-08, the learned

ITAT also came to the conclusion that there was no investment made by the

Respondent-Assessee in the foreign bank account in these two assessment

years and thus, the provisions of Section 69 could not have been invoked to

make the additions of US$ 11,02,829 and US$ 43,359 respectively.

3. Mr. Ajit Sharma, learned Senior Standing Counsel for the

Appellant-Revenue argues that the funds mentioned in the foreign bank

account represent the investment or the deposits made by the Respondent-

Assessee in the said bank account. The foreign investment was not disclosed

in his books of account and as such should be deemed to be the income in

terms of Section 69 of the Act. The money discovered in the foreign bank

account would be deemed to be income in that financial year in which the

information of investment having been made in the foreign account is made

available to the department. The statement recorded under Section 132(4), as

extracted in the assessment order, itself lends credence to the information

and documents made available to the Indian government as Respondent-Assessee's address on the documents matches with his present address, and he admits to knowing one Mr. Hinderling. Furthermore, the Respondent-Assessee conveniently refused to sign the consent waiver form, which would have enabled the government to unearth the truth behind the foreign account.

4. Mr. Jain, learned counsel for the Respondent-Assessee who appears

on advance notice at the outset submits that the Respondent-Assessee has

deceased. On merits, he defends the impugned order and argues that no

questions of law arise for consideration of the Court.

5. We have considered the submissions advanced by the learned counsel

for the parties. Since the Respondent-Assessee has deceased, the appeals are

not maintainable in the present form. Be that as it may, since we are not

inclined to entertain the appeals, as in our opinion no questions of law arise for our consideration, we are not going into the question of maintainability.

6. The Appellant-Revenue has proposed the common question of law

being urged in AY 2006-07 and AY 2007-08 regarding the quantum of

amount to be added, subject to a variance in the figures. The said question as proposed in the appeal pertaining to AY 2006-07 is reproduced here in below:

“a. Whether ITAT has not erred in deleting the addition of AY

2006-07 on quantum· addition of Rs. 4,90,20,749/- made by the

AO equivalent to US$ 11,02,829/- without considering that the

Assessee has opened and/or operated account(s) in HSBC Bank

and addition was made on account of undisclosed income and

interest accrued therein for AY 2006-07 in HSBC Geneva,

without appreciating the fact that the Assessee had not submitted

any detail regarding the same and neither signed the consent

waiver form, which would have enabled the department to seek

information from HSBC Bank Geneva?”

Further, following identical question of law in AYs 2007-08 to 2012-13,

except for the change in the figures, is urged in respect of addition of interest income. The question of law for the sake of convenience is extracted from the appeal in respect of AY 2007-08, as follows:

“b. Whether ITAT has not erred in deleting the addition of AY

2007-08 on Rs. 1,64,962/- made by the AO on account of

undisclosed interest income in HSBC Geneva on the alleged

balance appearing in the undisclosed foreign bank account

without considering that the Assessee would have earned interest

on his balance income in HSBC Geneva?”

7. In our view of the aforesaid, the learned ITAT has rightly held that

there could not be any dispute on the legal proposition that the very same

amount cannot be taxed twice in the two assessment years. The relevant

portion of the impugned order reads as under-

"5.1 Importantly, the assessee, while denying ownership of any

foreign bank account, in his income tax return for assessment

year 2012-13 offered for tax Rs. 5,81,32,321/- as amount

equivalent to US $11,46,368. On the other hand, the assessing

officer, apart from accepting the said offer in assessment year

2012-13, has also brought to tax US $ 11,02,829 and US$ 43,539

in assessment years 2006-07 and 2007-08 respectively. In fact, by

applying conversion rate of Rs. 44.45 per dollar and Rs. 43.17

per dollar in the assessment years 2006-07 and 2007-08, the

assessing officer taxed 4,90,20,749 _and Rs.18,79,578 in the said

assessment years, aggregating to Rs.5,09,00,327, which is less

than Rs.5,81,32,321 offered for tax by the assessee in assessment

year 2012-13. There can be no dispute with the settled legal

position that the very same amount cannot be taxed twice in two

different assessment years, which contention has also been

accepted by the Ld. CIT (A). Therefore, the very same amount

equivalent to US $11,46,368 cannot, in our view, be taxed twice,

once in assessment years 2006-07 and 2007-08 and secondly in

assessment year 2012-13.

[Emphasis Supplied]

5.9 On the other hand, the assessee offered for tax

Rs.5,81,32,321/- as amount equivalent to US $11,46,368 in

assessment year 2012-13 under section 69A of the Act, which

amount, as noticed above, is more than Rs. 5,09,00,327/- brought

to tax cumulatively by the assessing officer in assessment years

2006-07 and 2007-08. In view thereof and the entirety of the

circumstances discussed in the preceding paragraphs we are of

the considered opinion that the addition of Rs.4,90,20,749 made

by the assessing officer equivalent to US$ 11,02,829 in

assessment year 2006-07 under section 69 of the Act and similar

addition made in assessment year 2007-08, are not sustainable in

law and the same are hereby directed to be deleted. We therefore,

hold that the addition of Rs.4,90,20,749 in assessment year

2006-07 and similar addition of Rs.18,79,578 in assessment year

2007-08 are not sustainable in law and are hereby directed to be

deleted. As a consequence the amount offered for tax by the

assessee in assessment year 2012-13, being Rs. 5,81,32,321/-,

which was sustained by the Ld. CIT(A) on protective basis, is

hereby directed to be restored on substantive basis in assessment

year 2012-13. In the result, the grounds of appeal nos. 2 to 2.3

raised by the assessee in the assessment year 2006-07 are

allowed."

8. We do not find any perversity in the aforesaid observations made by

the learned ITAT in respect of additions made on quantum and interest. In

view of the aforesaid, the question of law raised by the Appellant-Revenue

in the present appeals in respect of quantum does not arise for our

consideration. Since the addition on quantum cannot be sustained, the

addition of interest cannot survive. Thus, no question of law arises in respect of deletion of addition of interest component.

9. Further, in ITA 53/2021, pertaining to AY 2012-13, there were certain

additional facts regarding the discovery of undisclosed jewellery which were

dealt with by the learned ITAT in detail. Before moving to the observations

of the learned ITAT in this regard, it is necessary to highlight the additional question proposed to be framed by the Appellant-Revenue. The same reads as under:

“a. Whether ITAT has not erred in deleting the addition of Rs.

1,12,89,616/- on account of alleged unexplained jewellery found

during the course of search, which has been confirmed n appeal

by CIT(A) without appreciating that assessee was unable to

provide an item wise reconciliation of jewellery to the extent of

6,716.700 grams (valued at Rs. 1,12,89,616) by the departmental

valuer applying the rates prevailing on the date of search?

The issue being canvassed in the aforementioned question has been dealt

with by the learned ITAT and the relevant portion of the impugned order

reads as under-

“8.11 We have carefully considered the rival submissions and the

relevant material and ratio of the orders and judgment relied by

both the parties, at the very outset we note that undisputedly the

quantum of jewellery declared in the wealth tax returns of the

assessee and his family members was much higher, than the

jewellery found during the course of search. CBDT Instruction

dated 11-5-1994 provides that no seizure should be made in the

search for the jewellery held by the ladies at 500 gms, girls at

250 gms and males at 100 gms each. Though the Instruction

speaks of not seizing the same, the extended meaning of the same

shows the intention that the jewellery is to be treated as explained

one and is not to be treated as unexplained for the purpose of

Income-tax Act. This instruction came to be considered by

several Benches all over India in which it has been held that it

would be relevant for the purposes of making addition as well.

The Hon'ble Rajasthan High Court in the case CIT v. Kailash

Chand Sharma 147 Taxman 376 has upheld this view. When this

instruction is applied to the facts of the case, we observe that the

possession of gold jewellery of 38,748.28gms, which is far less

than declared jewellery of 46,634.842 gms it cannot be held to be

unexplained.”

10. In our view of the finding of fact noted above, the conclusion arrived

at by the learned ITAT does not warrant any interference. No question of

law, much less a substantial question of law, has arisen for our consideration in the present appeals. Accordingly, the present appeals are dismissed along with the pending applications.